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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____ to _____
Commission File No. 0-20260
INTEGRAMED AMERICA, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1150326
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Two Manhattanville Road
Purchase, New York 10577
(Address of principal executive offices) (Zip Code)
(914) 253-8000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filer pursuant to Item
405 of Regulation S-K (17 CFR 229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
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Aggregate market value of voting stock (Common Stock, $.01 par value) held
by non-affiliates of the Registrant was approximately $13.8 million on June 30,
2003 based on the closing sales price of the Common Stock on such date.
The aggregate number of shares of the Registrant's Common Stock, $.01 par
value, outstanding was approximately 3,578,000 on March 6, 2004.
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DOCUMENTS INCORPORATED BY REFERENCE
See Part III hereof with respect to incorporation by reference from the
Registrant's definitive proxy statement for the fiscal year ended December
31, 2003 to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 and the Exhibit Index hereto.
PART I
ITEM 1. Business
Company Overview
IntegraMed America, Inc. (the "Company") offers products and services to
patients and providers in the fertility industry. The IntegraMed Network is
comprised of twenty-three fertility centers in major markets across the United
States, pharmaceutical products and services, a financing subsidiary, the
Council of Physicians and Scientists, and a leading fertility portal
(www.integramed.com). Sixteen Affiliate fertility centers purchase discrete
service packages provided by the Company and seven fertility centers have access
to the entire portfolio of products and services under the comprehensive
FertilityPartners(TM) program. All twenty-three fertility centers have access to
the Company's consumer services, principally pharmaceutical products and patient
financing products. The Company was incorporated in Delaware on June 4, 1985.
We maintain a website at www.integramed.com to provide information to the
general public and our shareholders on our products, resources and services,
along with general information on IntegraMed and its management, career
opportunities, financial results and press releases. Copies of our most recent
Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q or our other
reports filed with the Securities and Exchange Commission, or SEC, can be
obtained, free of charge as soon as reasonably practicable after such material
is electronically filed with, or furnished to the SEC, from our Investor
Relations Department by calling 914-253-8000, through an e-mail request from our
Investor Information web page at www.integramed.com, through the SEC's website
by clicking the direct link from our website at www.integramed.com or directly
from the SEC's website at www.sec.gov. Our website and the information contained
therein or connected thereto are not intended to be incorporated into this
Annual Report on Form 10-K.
Our Board of Directors has adopted a Code of Business Conduct that is
applicable to all of our directors, officers and employees, a copy of which is
attached as an exhibit to this annual report. Any material changes made to our
Code of Business Conduct or any waivers granted to any of our directors and
executive officers will be publicly disclosed by filing a current report on Form
8-K within five business days of such material change or waiver. We intend to
make a copy of the Code of Business Conduct as well as charters for our Audit
Committee and Nominating and Corporate Governance Committee, which comply with
the recently adopted corporate governance rules of NASDAQ, available on our
website at www.integramed.com. In addition, a copy of such documents will also
be made available to our shareholders upon request by contacting our Investor
Relations Department by calling 914-253-8000 or through an e-mail request from
our website at www.integramed.com.
Industry -- Reproductive Medicine
Reproductive medicine encompasses the medical discipline that focuses on
male and female reproductive systems and processes. There are many reasons why
couples have difficulty conceiving, and accurate identification of a specific
cause of infertility can be time consuming, expensive and requires access to
specialized diagnostic and treatment services. Many gynecologists do not have
the time or interest to perform a complete evaluation of the infertile couple
and therefore often bypass detailed diagnostic testing. Instead, they often
provide initial medical treatment of infertility, without extensive diagnosis,
by prescribing a drug called clomiphene citrate, which helps to correct
ovulatory problems. This treatment is fairly inexpensive and often resolves the
problem if the only obstacle to pregnancy is, in fact, an ovulatory problem. It
is generally recommended that women receive this therapy for no more than three
to six ovulatory cycles. If pregnancy has not occurred, referral should be made
to a fertility specialist who can offer more advanced treatments. Fertility
specialists are gynecologists who perform more sophisticated medical and
surgical fertility diagnosis and treatments. Reproductive endocrinology refers
to the diagnosis and treatment of all hormonal problems that lead to abnormal
reproductive function or have an effect on the reproductive organs. Reproductive
endocrinologists are physicians who have completed four years of residency
training in obstetrics and gynecology and have at least two years of additional
training in an approved subspecialty fellowship program.
Conventional fertility services include diagnostic tests performed on the
female, such as endometrial biopsy, laparoscopy/hysteroscopy examinations and
hormone screens, and diagnostic tests performed on the male, such as semen
analysis. Depending on the results of the diagnostic tests performed, treatment
options may include, among others, fertility drug therapy to stimulate regular
and predictable ovulation, artificial insemination and fertility surgeries to
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correct anatomical problems. Procedures that require gametes (sperm and eggs) to
be handled in vitro (outside the body) are classified as assisted reproductive
technology ("ART") services. Current types of ART services include in vitro
fertilization ("IVF"), gamete intrafallopian transfer ("GIFT"), zygote
intrafallopian transfer ("ZIFT"), tubal embryo transfer, frozen embryo transfer
and donor egg programs. IVF represents the most frequently employed form of ART.
Current techniques used in connection with IVF services include intracytoplasmic
sperm injection ("ICSI"), assisted hatching, cryopreservation of embryos and
blastocyst culture and transfer.
There are currently approximately 45,000 obstetricians/gynecologists in the
United States of which approximately 900 concentrate on providing fertility
services as reproductive endocrinologists. There are currently approximately 421
centers across the country that provide ART services. These centers are
predominantly staffed by reproductive endocrinologists. Approximately one-third
of the ART centers are hospital-based and two-thirds are physician-office based.
As ART has become more sophisticated, more predictable and less experimental,
there has been a clear shift of services out of hospitals and into physician
offices. Compared to other medical niches, the fertility services industry is
concentrated among relatively few providers and few manufacturers of medications
and devices.
Infertility is generally defined as the inability to conceive after one or
more years of a couple having unprotected intercourse. According to The American
Society for Reproductive Medicine in its most recent published data, it is
estimated that in 1996 approximately 10% of couples, or 6.1 million couples, had
impaired fertility. According to the 1999-2000 Dorland Biomedical Healthcare
Marketplace Guide, the annual expenditures relating to fertility services are
approximately $2 billion. The Company believes that multiple factors over the
past several decades have affected fertility levels. A demographic shift in the
United States toward the deferral of marriage and first birth has increased the
age at which women are first having children. This, in turn, increases the
incidence of infertility, making conception more difficult, thereby increasing
the demand for ART services. Fortunately, technological advances in the
treatment of infertility, especially IVF, have enhanced treatment outcomes and
the prognoses for many couples.
According to the latest survey on the subject, the William M.
Mercer/Foster-Higgins' National Survey of Employer-sponsored Health Plans/1995,
approximately one quarter of all health plan sponsors with at least 10 employees
provide some coverage for the treatment of infertility. Because patients seeking
fertility treatment often have other gynecological symptoms, health plans may
cover diagnostic expenses even when infertility treatment itself, is not a
covered benefit. Currently, there are several states that mandate offering
benefits of varying degrees for fertility services, including ART services. In
some states, the mandate is limited to an obligation on the part of the payer to
offer the benefit to employers. In Massachusetts, Rhode Island, Maryland,
Arkansas, Illinois, Hawaii and New Jersey the mandate requires coverage of
conventional fertility services, as well as ART services. In addition to payer
driven initiatives to broaden coverage, several legislative initiatives are
emerging as a driving force behind making fertility services more readily
available. Finally, the 1998 Supreme Court ruling that reproduction is a major
life activity covered under the Americans with Disability Act (the "ADA") led to
an Equal Employment Opportunity Commission administrative ruling that a New York
company discriminated against one of its employees by not providing insurance
coverage for fertility services.
ART services are the most rapidly growing segment of the fertility market.
According to the Society of Assisted Reproductive Technology ("SART"),
approximately 10,000 ART procedures were performed in 1987. In 2001, the most
recent year for which data are available, approximately 108,000 ART procedures
were performed. There is reason to believe that the market will continue to grow
in the future for the following reasons: (i) the quality of ART treatments is
improving, making outcomes much more acceptable; (ii) improvements in embryo
culture media and implantation rates are leading to the capability of reducing
high order multiple pregnancies - one of the greatest risk factors of ART
services; (iii) with improving pregnancy rates, the cost of treatment is
decreasing thereby making high technology services more affordable; (iv) new ART
services that improve embryo quality and the likelihood of pregnancy, such as
blastocyst culture and transfer, continue to emerge fueling an expansion of the
industry; (v) the improving relationship between cost and quality is causing
physicians to substitute more effective ART treatments for less effective
conventional fertility services; (vi) public policy initiatives including
legislative mandates for insurance coverage and the definition of reproduction
as a major life activity covered by the ADA are producing a more favorable
reimbursement climate; and (vii) demand for ART services is increasing through
greater public awareness and acceptance of ART services.
The market conditions producing business opportunities for the Company
include: (i) the high level of specialized skills and technology required for
comprehensive patient treatment; (ii) the capital-intensive nature of acquiring
and maintaining state-of-the-art medical equipment, laboratory and clinical
facilities; (iii) the need to develop and maintain specialized management
information systems to meet the increasing demands of technological advances,
patient monitoring and third-party payers; (iv) the need for seven-days-a-week
service to respond to patient needs and to optimize the outcomes of patient
treatments; (v) the high cost of treatment with inadequate insurance benefits in
most markets; and (vi) the high cost of pharmaceutical products requiring
patient education and support.
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Company Strategy
The Company's strategy is to align information, technology and finance for
the benefit of fertility patients, providers, and payers. The primary elements
of the Company's strategy include: (i) expanding the IntegraMed Provider Network
into new major markets; (ii) increasing the number and value of service packages
purchased by members of the IntegraMed Provider Network; (iii) entering into
additional FertilityPartners(TM) contracts; (iv) increasing revenues at
contracted FertilityPartners(TM) centers; (v) increasing the number of Shared
Risk Refund(TM) treatment packages (as defined below) sold to patients of the
IntegraMed Provider Network and managing the risk associated with the Shared
Risk Refund program; (vi) increasing sales of pharmaceutical products and
services; and (vii) developing Internet-based access to personalized health
information.
(i) Expand the IntegraMed Provider Network
The Company will seek to expand the IntegraMed Provider Network to cover
additional major market areas across the country. The Company will primarily
focus the IntegraMed Provider Network development activities on major markets
with populations in excess of one million because the demographics of consumers
who access fertility services are consistent with the demographics of most major
metropolitan markets. In addition, the relatively low incidence of infertility
requires a large population base to support a sophisticated fertility center.
The Company believes high quality fertility centers are capable of drawing
consumers from approximately a one hundred mile radius or more if alternatives
are unavailable. It is the Company's belief that these market dynamics would
allow the Company to cover a large percentage of the national population by
expanding the IntegraMed Provider Network to the fifty largest metropolitan
markets across the country.
The entry point for fertility centers participating in the IntegraMed
Provider Network is the Affiliate. Contracted fertility centers that become
Affiliates have access to the Company's products and services that support
patient recruitment. Included in this program are (i) Shared Risk Refund
treatment packages (as described below), (ii) treatment financing and (iii)
Internet marketing. The Company licenses these programs to a select number of
leading fertility centers in each market.
(ii) Increase the Number and Value of Service Packages sold to
Participating Fertility Centers
The Company has a portfolio of discrete service packages that are sold to
fertility centers participating in the IntegraMed Provider Network. The
Company's service offerings include:
FertilityWeb(TM) - a Web Site development, hosting and marketing service
that helps contracted fertility centers develop and maintain a modern,
transaction oriented Web Site. Web Sites for contracted fertility centers are
built with a technology known as Dynamic Site Rendering Engine ("DSRE"). DSRE
also contains a web editing tool that permits anyone with a common web browser
to maintain the Web Site to ensure it is up to date. Contracted fertility
centers also gain access to additional web site visitors by virtue of their
placement on www.integramed.com, the Company's industry leading web site.
FertilityPurchase(TM) - a group purchasing program exclusively available to
fertility centers participating in the IntegraMed Provider Network. The focus of
the FertilityPurchase program is on high cost disposable supplies, laboratory
reagents and capital equipment used by fertility centers in diagnosing and
treating infertility. The Company intends to extend this program to include
other products and services that fertility centers commonly purchase in the
ordinary course of business, including malpractice insurance, computers and
medical supplies.
FertilityMarKit(TM) - a package of award-winning marketing and sales
programs that have helped contracted fertility centers to grow at three times
the average rate for the industry. This service includes access to the Company's
proprietary marketing collateral material library of ads, brochures, fliers and
announcements. In addition, the Company conducts quarterly sales and marketing
training seminars, offers a media buying service and produces radio and
television ads and educational videos.
ARTWorks(R) Clinical Information System - a proprietary clinical
information system focused exclusively on the unique requirements of providing
clinical care to patients seeking fertility treatment. Owned and maintained by
the Company, ARTWorks Clinical Information System is distributed on an
application services provider ("ASP") model. Under this model, the Company
maintains the application in its dedicated data center in New York. Contracted
fertility centers only need to gain access to the application with an
appropriate telecommunication link and maintain their own local area network to
utilize the application. The benefit of the ASP model is that the Company's
customers do not need to invest in expensive hardware or licensing fees to gain
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access to the application. The Company has also optimized the application by
developing and maintaining an interface with commonly used laboratory equipment
and the Company's chosen practice management and financial information systems.
ARTWorks Practice Management Information System - based on the Misys Vision
system, is an information system that enables contracted fertility centers to
have a sophisticated scheduling, billing and accounts receivable system. The
Misys system is also offered on an ASP model, which permits contracted fertility
centers to gain access to a powerful practice management system at a fraction of
the cost of traditional installation. This system has been customized to the
unique requirements of fertility centers and has helped contracted fertility
centers to maintain excellent performance on managing accounts receivable.
FertilityPartners(TM) - fertility centers that contract for this program,
receive a comprehensive, turnkey fertility center operation, may use the
"Reproductive Science Center" designation and have access to the Company's
entire portfolio of services including: (i) administrative services, including
accounting and finance, human resource functions, and purchasing of supplies and
equipment; (ii) access to capital and servicing and financing patient accounts
receivable; (iii) marketing and sales; (iv) integrated information systems; and
(v) assistance in identifying best clinical practices.
(iii) Entering in to FertilityPartners(TM) Contracts
Fertility centers participating in the FertilityPartners program are
entitled to the Company's full service support. The Company will primarily focus
its FertilityPartners contracting efforts on fertility centers participating as
Affiliates in the IntegraMed Provider Network. These Affiliate fertility centers
have contracted with the Company for more limited, discrete service packages and
have developed a good working relationship with the Company. This good working
relationship mitigates risk associated with capital investments that are part of
the FertilityPartners program. The Company believes that a number of factors
will contribute to the successful transition of certain Affiliate fertility
centers in the IntegraMed Provider Network to the FertilityPartners program.
These factors include: (i) the high quality reputation of the Company in
providing services in the areas of fertility and ART services; (ii) the
Company's expertise in assisting its customers in increasing revenues and
maintaining cost efficient operations; (iii) the Company's success in improving
patient outcomes by providing laboratory support services to the
FertilityPartners program; and (iv) the capital intensive nature of operating
modern, sophisticated fertility centers and the difficulty most physician groups
have in accessing sufficient capital.
(iv) Increasing Revenues from FertilityPartners(TM) Contracts
The Company expects to increase revenues derived under its
FertilityPartners contracts by: (i) sponsoring mergers with smaller fertility
physician group practices; (ii) making available expanded laboratory and ART
services at the fertility centers, thereby increasing revenues per patient; and,
(iii) making available increased marketing and sales support to fertility
centers.
(v) Increasing the Number of Shared Risk Refund Treatment Packages Sold and
Managing the Associated Risk
The Company will seek to increase the number of Shared Risk Refund
treatment packages sold directly to consumers. The Shared Risk Refund program
was established at Shady Grove Fertility Reproductive Science Center ("Shady
Grove") - the leading fertility center in the metropolitan Washington, DC area,
a FertilityPartner and a member of the IntegraMed Provider Network. Based on the
experience at Shady Grove, the Company developed an actuarial model that allows
pricing a treatment package to consumers. The Shared Risk Refund program
consists of a package that includes up to three cycles of in vitro fertilization
for one fixed price with a significant refund if the patient does not deliver a
baby. Under this innovative financial program, the Company receives payment
directly from consumers who qualify for the program and pays contracted
fertility centers a defined reimbursement for each treatment cycle performed.
To manage the risk associated with the Shared Risk Refund program, the
Company has developed a pre-authorization and a case management program. The
pre-authorization is a structured process of collecting pre-treatment diagnostic
information on each patient seeking enrollment in the Shared Risk Refund
program. By evaluating clinical information the Company can assess the
likelihood of any individual achieving pregnancy. In addition, each patient
enrolled in the Shared Risk Refund program is evaluated as part of a case
management program to continually assess response to treatment. Both the
pre-authorization program and the case management program help to manage the
risk fundamental to the Shared Risk Refund program.
(vi) Increasing Sales of Pharmaceutical Products and Services
The Company will continue its efforts to expand the pharmaceutical products
and services line by: (i) providing Education Matters(TM) - a comprehensive
patient educational support program; (ii) packaging products in the Cycle
Kit(TM)- a unique packaging system that provides patients with all supplies and
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instructions for proper utilization of medication; (iii) minimizing cost to
patients and payers by implementing Cycle Track(TM) - a fertility pharmaceutical
case management system that dispenses only the required amount of medication for
patients to complete their treatment; (iv) implementing an aggressive marketing
and sales program in cooperation with ivpcare, inc. (the supplier of
pharmaceuticals to IntegraMed Pharmaceutical Services, Inc., a wholly-owned
subsidiary of the Company ("IPSI")); and (v) expanding the offering beyond the
six FertilityPartners centers to the entire IntegraMed Provider Network.
(vii) Developing Internet-Based Access to Personalized Health Information
The Company will continue to develop www.integramed.com as a leading
fertility portal. The web site has provided a direct marketing infrastructure
that allows the Company to offer efficient transaction processing capability for
consumers and affiliated fertility centers. Currently consumers can participate
in an on-line tutorial, subscribe to a bi-weekly newsletter, apply for an
appointment, apply for treatment financing, apply for the Shared Risk Refund
program and apply to become an egg donor. All transactions are logged to an
Oracle database housed in the Company's data center. In addition, contracted
fertility centers receive patient inquiries and referrals as appropriate.
Core Competencies
The Company's service packages are constructed from core competencies. In
particular, the Company's core competencies include: (i) administrative
services, including accounting and finance, human resource functions, and
purchasing of supplies and equipment; (ii) access to capital and servicing and
financing patient accounts receivable; (iii) marketing and sales; and (iv)
integrated information systems.
By providing fertility centers with access to these resources, the Company
enables contracted fertility centers to achieve improved efficiencies and
business outcomes.
(i) Administrative Services
The Company provides administrative services to fertility centers,
including: (i) accounting and finance services, such as billing and collections,
accounts payable, payroll, and financial reporting and planning; (ii)
recruiting, hiring, training and supervising all non-medical personnel; and
(iii) purchasing of supplies, pharmaceuticals, equipment, services and
insurance.
(ii) Access to Capital
The Company provides fertility centers with a significant competitive
advantage through immediate access to capital for expansion and growth. The
Company also offers physician providers in its network rapid access to the
latest technologies and facilities in order for them to provide a full spectrum
of services and compete effectively for patients in the marketplace. For
example, the Company has built a new facility that includes an embryology
laboratory for certain fertility centers, thereby enabling them to expand their
service offerings to include a number of services (including laboratory and ART
services) which had previously been outsourced. The Company believes that access
to these facilities and new technologies has improved the ability of the
fertility centers to offer comprehensive high quality services, expand the
revenue base per patient, and compete effectively.
The Company provides fertility centers with accelerated operating capital
through its receivable financing program. For a fertility center, this means
access to funds upon billing for services rather than waiting for the collection
of the accounts receivable which occurs within 15 to 60 days.
(iii) Marketing and Sales
The Company's marketing and sales department specializes in the development
of sophisticated marketing and sales programs giving fertility centers access to
business-building techniques to facilitate growth and development. In today's
highly competitive health care environment, marketing and sales are essential
for the growth and success of fertility centers. However, these marketing and
sales efforts are often too expensive for many physician practice groups.
Affiliation with the IntegraMed Provider Network provides physicians access to
significantly greater marketing and sales capabilities than would otherwise be
available. The Company's marketing services focus on revenue and referral
enhancement, relationships with local physicians, media and public relations and
managed care contracting.
(iv) Integrated Information System
The Company is using its established base of fertility centers to
continuously develop a nationwide, integrated information system, called
ARTWorks(TM), to collect and analyze clinical, patient, financial and marketing
data. The Company believes it is able to use this data to control expenses,
measure patient outcomes, improve patient care, develop and manage utilization
rates and maximize reimbursements. The Company also believes this integrated
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information system allows the fertility centers to more effectively compete for
and price managed care contracts, in large part because an information network
can provide these managed care organizations with access to patient outcomes and
cost data.
FertilityPartners Contracts
The Company has a FertilityPartners contract with seven fertility centers,
which in turn employ and/or contract with the physicians.
Current FertilityPartners Contracts
The Company currently has contracts with seven fertility centers consisting
of 30 locations in 10 states and the District of Columbia. There are 56
physicians and Ph.D. scientists, including physicians and Ph.D. scientists
employed and/or contracted by the fertility centers, as well as physicians who
have arrangements to utilize the Company's facilities. The following table
describes in detail each fertility center:
Number of Initial
Number of Physicians and Business Services
Fertility Centers State Locations Ph.D. Scientists Contract Date
----------------- ----- --------- ---------------- -------------
Reproductive Science Center of Boston........ MA, NH & RI 5 10 July 1988
Reproductive Science Center of the Bay Area
Fertility and Gynecology Medical Group.... CA 3 6 January 1997
Fertility Centers of Illinois................ IL 10 12 August 1997
Shady Grove Fertility Reproductive
Science Centers........................... MD, VA & DC 6 13 March 1998
IVF Florida ................................. FL 3 5 April 2002
Reproductive Endocrine Associates of Charlotte NC 1 6 September 2003
To be disclosed.............................. tbd 2 4 January 2004
Establishing FertilityPartners Contracts
In establishing a FertilityPartners contract, the Company typically: (i)
acquires certain assets of a fertility center; (ii) enters into a long-term
services agreement with the fertility center under which the Company provides
comprehensive services; and (iii) assumes the principal administrative and
financial functions of the fertility center. In addition, the Company typically
requires (a) that the fertility center enter into long-term employment
agreements containing non-compete provisions with the affiliated physicians and
(b) that each of the physician shareholders of the fertility center enter into a
personal responsibility agreement with the Company. Typically, the fertility
center's related medical practice contracting with the Company is a professional
corporation in which certain of, or all of, the physicians are the shareholders.
Typically, the FertilityPartners contracts obligate the Company to pay a
fixed sum for the exclusive right to service the fertility center, a portion or
all of which is paid at the contract signing with any balance to be paid in
future annual installments. The agreements are typically for terms of 10 to 25
years and are generally subject to termination due to insolvency, bankruptcy or
material breach of contract. Generally, no shareholder of the fertility center
may assign his interest in the fertility center without the Company's prior
written consent.
The FertilityPartners contract provides that all patient medical care at a
contracted fertility center is to be provided by the physicians of the fertility
center and that the Company generally is responsible for providing defined
services to the fertility center. The Company provides the equipment, facilities
and support necessary to operate the fertility center and employs substantially
all such other non-physician personnel as are necessary to provide technical,
consultative and administrative support for the patient services at the
fertility center. Under certain agreements, the Company is committed to provide
a clinical laboratory. Under the agreements, the Company may also advance funds
to the fertility center for providing new services, utilize new technologies,
fund projects, purchase the net accounts receivable, provide working capital or
fund mergers with other physicians or physician groups.
Under all seven FertilityPartners agreements, the Company receives as
compensation for its services a three-part fee comprised of: (i) a variable
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percentage of net revenues generally up to 6%; (ii) reimbursed costs of services
(costs incurred in providing services to a fertility center and any costs paid
on behalf of the fertility center); and (iii) a fixed percentage of earnings
after the initial service fees which currently ranges from 10% to 19%.
Recent additions to the FertilityPartners program follow:
On April 26, 2002, the Company signed a FertilityPartners agreement with
the Margate, Florida based Northwest Center for Infertility and Reproductive
Endocrinology ("NCIRE"). Under the terms of the 15-year agreement, the Company's
service fees are comprised of reimbursed costs of services, a tiered percentage
of revenues, and an additional fixed percentage of NCIRE earnings.
On September 1, 2003, the Company signed a FertilityPartners agreement with
the Charlotte, North Carolina based Reproductive Endocrinology and Andrology of
Charlotte ("REACh") physician practice. Under the terms of this 15-year
agreement, the Company's service fees are comprised of reimbursed costs of
services, a tiered percentage of revenues, and an additional fixed percentage of
REACh's earnings.
In January 2004, the Company signed a FertilityPartner agreement to supply
a complete range of business, marketing and facility services to group of
fertility physicians in the Company's Western Region. Under the terms of the
15-year agreement, IntegraMed will be paid a fixed services fee commencing in
January of 2004 paid monthly until the new facility is open, which is
anticipated to be in Q4 of 2004. At that time, IntegraMed service fees will be
comprised of the Company's standard reimbursed costs of services, a fixed
percentage of revenues, plus an additional fixed percentage of the new center's
earnings.
IntegraMed, on November 25, 2002, announced the ending of its
FertilityPartners agreement with RSA of New York. The agreement ended on
November 15, 2003. RSA of New York serves the Long Island market and revenues
for the four quarterly periods ending prior to the announcement were $9.1
million. The program had a contribution of $750,000 for the same period.
The Company reports all fees as "Revenues, net." Direct costs incurred by
the Company in performing its services and costs incurred on behalf of the
fertility centers are recorded in "cost of services incurred". The physicians
receive as compensation all remaining earnings after payment of the Company's
compensation.
Physician Employment Agreements
Employment agreements between the fertility centers and physicians
generally provide for an initial term ranging from three to five years. The term
may be automatically renewed at successive intervals unless the physician or the
fertility center elects not to renew or such agreement is otherwise terminated
for cause or the death or disability of a physician. The physicians are paid
based upon either the number of procedures performed or other negotiated
formulas agreed upon between the physicians and the fertility center, and the
fertility centers provide the physicians with health, death and disability
insurance and other benefits. The fertility centers are obligated to obtain and
maintain professional liability insurance coverage, procured on behalf of the
physicians. Pursuant to the employment agreements, the physicians agree not to
compete with the fertility center with which they have contracted during the
term of the agreement and for a certain period following the termination of such
employment agreement. In addition, the agreements contain customary
confidentiality provisions.
Affiliate Care/Satellite Service Agreements
Fertility centers may also have affiliate care agreements and satellite
service agreements with physicians who are not employed by the fertility center.
Under an affiliate care agreement, the fertility center contracts with a
physician to provide certain services for the fertility center's patients, such
as endocrine/ultrasound monitoring, or ART services.
Pharmaceutical Services
IPSI markets fertility-related pharmaceutical products to certain
participating providers in the IntegraMed Provider Network. IPSI contracts with
ivpcare, inc., a licensed pharmacy specializing in dispensing pharmaceutical
products, which provides certain business services to IPSI.
Financing Subsidiary
IntegraMed Financial Services, Inc. ("IFS"), a wholly owned subsidiary of
the Company, arranges financing to qualified patients of the IntegraMed Provider
Network at rates significantly lower than credit cards and other finance
companies. IFS is administered by AmeriFee LLC, a third party vendor, which
provides administrative management services to IFS. The loans are made to
qualified patients by a third party bank. The patient makes payment directly to
8
the medical practice. The bank pays a placement fee to the Company. Such revenue
is recorded when the Company receives the cash at the time of closing the
transaction.
Council of Physicians and Scientists
The Company's Council of Physicians and Scientists (the "Council"),
comprised mostly of representatives from the IntegraMed Provider Network, was
established in 1996 to bring together leaders in reproductive medicine and
embryology to promote a high quality clinical environment in the IntegraMed
Provider Network. The Council meets twice each year and conducts monthly
teleconferences on topics related to improving infertility treatment and
diagnosis. The Council publishes its recommendations and the Company's staff
follows up on implementing Council recommendations. The Council reviews and
recommends accepting or denying additional physicians who want to join the
IntegraMed Provider Network based on objective clinical credentialing criteria.
Reliance on Third-Party Vendors
IPSI, as well as all medical providers who deliver services requiring
fertility medication, are dependent on three third-party vendors that produce
such medications (including but not limited to: Lupron, Follistim, Repronex,
GonalF and Pregnyl) that are vital to treating infertility and ART services.
Should any of these vendors experience a supply shortage, it may have an adverse
impact on the operations of the IntegraMed Provider Network. To date, the
IntegraMed Provider Network has not experienced any such adverse impacts.
Competition
The business of providing health care services is intensely competitive and
providers strive to find the most cost-effective method of providing quality
health care. Although the Company focuses on medical groups that provide
fertility and ART services, it competes for contracts with other health care
services and management companies, as well as hospitals and hospital-sponsored
management services organizations. If federal or state governments enact laws
that attract other health care providers to the managed care market, the Company
may encounter increased competition from other institutions seeking to increase
their presence in the managed care market and which have substantially greater
resources than the Company. There can be no assurance that the Company will be
able to compete effectively with its current competitors. Nor can there be
assurance that additional competitors will not enter the market, or that such
competition will not make it more difficult to acquire the assets and service
rights of fertility centers on terms beneficial to the Company.
The fertility industry is highly competitive and characterized by
technological improvements. New ART services and techniques may be developed
that may render obsolete the ART services and techniques currently employed at
the fertility centers. Competition in the areas of fertility and ART services is
largely based on pregnancy and other patient outcomes. Accordingly, the ability
of a fertility center to compete is largely dependent on its ability to achieve
adequate pregnancy rates and patient satisfaction levels.
Government Regulation
As a participant in the health care industry, the Company's operations and
its relationships with the FertilityPartners centers and the IntegraMed Provider
Network are subject to extensive and increasing regulation by various
governmental entities at the Federal, state and local levels. These include, but
are not limited to, Federal and State Anti-Kickback Laws, Federal and State
Self-Referral Laws, False Claim Laws, Federal and State Controlled Substances
laws and regulations and Anti-Trust Laws. The Company believes its operations
and those of the FertilityPartners centers are in material compliance with
applicable health care laws. Nevertheless, the laws and regulations in this area
are extremely complex and subject to changing interpretation and many aspects of
the Company's business and business opportunities have not been the subject of
federal or state regulatory review or interpretation. Accordingly, there is no
assurance that the Company's operations have been in compliance at all times
with all such laws and regulations. In addition, there is no assurance that a
court or regulatory authority will not determine that the Company's past,
current or future operations violate applicable laws or regulations. If the
Company's interpretation of the relevant laws and regulations is inaccurate,
there could be a material adverse effect on the Company's business, financial
condition and operating results. There can be no assurance that such laws will
be interpreted in a manner consistent with the Company's practices. There can be
no assurance that a review of the Company or the fertility centers by courts or
regulatory authorities will not result in a determination that would require the
Company or the fertility centers to change their practices. There also can be no
assurance that the health care regulatory environment will not change so as to
restrict the Company's or the fertility centers' existing operations or their
expansion. Any significant restructuring or restriction could have a material
adverse effect on the Company's business, financial condition and operating
results.
9
Corporate Medical Practice Laws. The Company's operations may be subject to
state laws relating to corporations practicing medicine. State laws may prohibit
corporations other than medical professional corporations or associations from
practicing medicine or exercising control over physicians, and may prohibit
physicians from practicing medicine in partnership with, or as employees of, any
person not licensed to practice medicine. Furthermore, operations in California,
Maryland and Illinois may be subject to fee-splitting prohibitions. State law
may also prohibit a corporation other than professional corporations or
associations (or, in some states, limited liability companies) from acquiring
the goodwill of a medical practice. The Company believes its operations are in
material compliance with applicable state laws relating to the corporate
practice of medicine. The Company performs only non-medical administrative
services, and in certain circumstances, clinical laboratory services. The
Company does not represent to the public that it offers medical services. In
each state, the fertility center is the sole employer of the physicians, and the
fertility center retains the full authority to direct the medical, professional
and ethical aspects of its medical practice. However, although the Company
believes its operations are in material compliance with applicable state
corporate practice of medicine laws, the laws and their interpretations vary
from state to state, and are enforced by regulatory authorities who have broad
discretionary authority. There can be no assurance that these laws will be
interpreted in a manner consistent with the Company's practices or that other
laws or regulations will not be enacted in the future that could have a material
adverse effect on the Company's business, financial condition and operating
results.
Health Insurance Portability and Accountability Act. Recently, the
healthcare industry began to focus on the impact that the Health Insurance
Portability and Accountability Act ("HIPAA") regulations and implementation
might have on their operations and information systems. HIPAA was designed to
reduce the amount of administrative waste in healthcare today and to further
protect the privacy of any patient's medical information. HIPAA regulations
identify certain standards for both manual processes and automated processes and
systems handling patient medical information. The HIPAA regulations relating to
privacy of medical information were implemented on April 14, 2003. HIPAA
regulations related to standard data formats and data sets for electronic
transaction processing were implemented on October 16, 2003. Additional HIPAA
regulations for security are scheduled to be implemented in April 2005. The
HIPAA regulations may impose the need for additional required enhancements of
the Company's internal systems. While the Company will incur costs to become
compliant with the HIPAA regulations, management believes the regulations will
not have a significant overall impact on the Company's results of operations.
Liability and Insurance
Providing health care services entails a substantial risk of potential
medical malpractice and similar claims. The Company does not itself engage in
the practice of medicine or assume responsibility for compliance with regulatory
requirements directly applicable to physicians, and therefore requires
associated fertility centers to maintain medical malpractice insurance. In
general, the Company has established a program that provides the fertility
centers with such required insurance. However, in the event that services
provided at the fertility centers or any affiliated medical practice are alleged
to have resulted in injury or other adverse effects, the Company is likely to be
named as a party in a legal proceeding.
Although the Company currently maintains liability insurance that it
believes is adequate in risk and amount, successful malpractice claims could
exceed the limits of the Company's insurance and could have a material adverse
effect on the Company's business. Moreover, there is no assurance that the
Company will be able to obtain such insurance on commercially reasonable terms
in the future or that any such insurance will provide adequate coverage against
potential claims. In addition, a malpractice claim asserted against the Company
could be costly to defend, could consume management resources and could
adversely affect the Company's reputation and business, regardless of the merit
or eventual outcome of such claim. In addition, in connection with the asset
acquisition of certain fertility centers, the Company may assume some of the
fertility center's stated liabilities. Therefore, an entity may assert claims
against the Company for events related to the fertility center prior to its
becoming a FertilityPartner. The Company maintains insurance coverage related to
those risks that it believes is adequate as to the risks and amounts, although
there is no assurance that any successful claims will not exceed applicable
policy limits.
There are inherent risks specific to the provision of ART services.
Currently, fertility medication is critical to most ART services and a ban by
the United States Food and Drug Administration or any limitation on its use
would have a material adverse effect on the Company. Furthermore, ART services
increase the likelihood of multiple births, which are often premature and may
result in increased costs and complications.
Employees
As of March 14, 2004, the Company had 700 employees. Of these, 664 are
employed at the FertilityPartners contracted fertility centers and 36 are
employed at the Company's headquarters, including 7 who are executive
management. Of the Company's employees, 140 persons at the FertilityPartners
contracted fertility centers and one at the Company's headquarters are employed
on a part-time basis. The Company is not a party to any collective bargaining
agreement and believes its employee relationships are good.
10
Segment Information
The Company is principally engaged in providing products and services to
the fertility market. For disclosure purposes, the Company recognizes services
offered to its network of fertility centers and its pharmaceutical distribution
operations as separate reporting segments. The services segment includes revenue
and costs categorized as FertilityPartners Service Fees and FertilityDirect
revenue, as follows (000's omitted):
Pharmaceutical
Corporate Services Distribution Consolidated
--------- -------- ------------ ------------
For the Year ended December 31, 2003
Percentage of total revenues........... (0.2)% 82.8% 17.4% 100.0%
Revenues............................... $ (182) $77,571 $16,301 $93,690
Cost of Services....................... -- 67,403 15,830 83,233
-- ------- ------- -------
Contribution........................... (182) 10,168 471 10,457
General and administrative costs....... 8,761
Interest, net.......................... (16)
-------
Income before income taxes............. 1,712
-------
Depreciation expense included above.... 2,163
Capital expenditures................... 440 7,195 -- 7,635
Total assets........................... 9,068 43,491 3,050 55,609
For the Year ended December 31, 2002
Percentage of total revenues........... (0.4)% 78.0% 22.4% 100.0%
Revenues............................... $ (322) $68,813 $19,709 $88,200
Cost of Services....................... -- 59,953 18,396 78,349
-------- ------- ------- -------
Contribution........................... (322) 8,860 1,313 9,851
General and administrative costs....... 8,097
Interest, net.......................... 52
-------
Income before income taxes............. 1,702
-------
Depreciation expense included above.... 2,162
Capital expenditures................... 238 1,792 -- 2,030
Total assets........................... 10,214 35,403 1,827 47,444
For the Year ended December 31, 2001
Percentage of total revenues........... 0% 79.6% 20.4% 100.0%
Revenues............................... $ -- $58,791 $15,107 $73,898
Cost of Services....................... -- 49,510 14,503 64,013
-------- ------- ------- -------
Contribution........................... -- 9,281 604 9,885
General and administrative costs....... 7,827
Interest, net.......................... 102
--------
Income before income taxes............. $ 1,956
========
Depreciation expense included above.... $ 1,652
Capital expenditures................... $ 161 $ 1,504 $ -- $ 1,665
Total assets........................... $11,325 $31,138 $ 2,158 $ 44,621
11
Significant Service Contracts
For the years ended December 31, 2003, 2002, and 2001 the following
fertility centers each individually provided greater than 10% of the Company's
Revenues, net and/or contribution as follows:
Percent of Company Percent of
Revenues, net Contribution
--------------------------- ---------------------------
2003 2002 2001 2003 2002 2001
------- ------ ------ ------- ------ ------
Boston......................... 10.4 10.8 10.9 13.9 14.2 12.6
Long Island.................... 5.1 10.0 10.8 6.4 5.2 6.9
New Jersey..................... -- -- 1.9 -- -- 12.0
Illinois....................... 27.9 27.7 29.3 26.4 31.0 29.5
Shady Grove.................... 20.7 17.7 17.3 25.0 26.3 21.2
Bay Area....................... 7.7 7.4 8.4 8.6 10.9 10.6
ITEM 2. Properties
The Company's headquarters and executive offices are in Purchase, New York,
where it occupies approximately, 18,600 square feet under a lease expiring in
2012 at a monthly rental ranging from $29,500 to $51,100.
The Company leases, subleases, and/or occupies, pursuant to its
FertilityPartners agreements, each fertility center location from third-party
landlords. Costs associated with these agreements are included in "Cost of
services rendered" and are reimbursed to the Company as part of its fee;
reimbursed costs are included in "Revenues, net".
The Company believes its executive offices and the space occupied by the
fertility centers are adequate.
ITEM 3. Legal Proceedings
In June 2002, the Company was served with a complaint, captioned
WINFertility, Inc. vs. IntegraMed America, Inc., in which the plaintiff filed an
action in the Supreme Court of New York, Westchester County, alleging breach of
contract and seeking damages in excess of $5 million. The Company had retained
WINFertility in April 2001 to provide claims management services in connection
with the Company's Shared Risk Refund Program. WINFertility failed to provide
the services for which the Company contracted and the Company terminated the
contract in May 2002. The Company has served and filed an answer denying all
material allegations of the complaint and asserting affirmative defenses. The
Company has also filed a counterclaim against the plaintiff demanding an
accounting and return of certain fees paid to plaintiff by the Company. The
Company believes it has meritorious defenses to the claims, and based on opinion
of counsel, believes that the likelihood of the suit having a material adverse
effect on the financial position, results of operations or the cash flow of the
Company is remote.
On June 6, 2003 the Company filed a lawsuit against Pediatric Physician
Alliance, Inc. and its parent company, Integrated Physician Solutions, in the
United States District Court for the District of New Jersey asserting, among
other things, that the defendants, long after the Company's adoption and use of
the INTEGRAMED and INTEGRAMED AMERICA(R) trademarks, began using the mark
INTEGRIMED in connection with the sale, offering for sale, distribution and
advertising of business management and consultation services for office-based
medical practices and organizations in the field of health care. The Company is
also asserting, in the lawsuit, that the defendants' use of the IntegriMed mark
is a colorable imitation of the Company's registered mark INTEGRAMED AMERICA and
is likely to cause confusion, or to cause mistake, or to deceive, in violation
of the Lanham Act. The Company is seeking relief against defendants, among other
things, declaring that the defendants have infringed the Company's trademarks,
enjoining defendants from using the IntegriMed mark, and compensatory and
punitive damages.
On November 12, 2003 an action captioned South Broward Hospital District
vs. Wayne S. Maxson, M.D. et. al. was filed against, among others, the Company
and one of its FertilityPartners, in the Broward County Florida Circuit Court
alleging that the Company had interfered with the contractual relationship
between the Hospital and certain individuals. The Company and the other
defendants have filed a motion to dismiss the Complaint. Moreover, the Company
believes that if the Company's motion to dismiss is denied, the Company has
meritorious defenses to the claims and that the likelihood of the suit having a
material adverse effect on the financial position, results of operations or the
cash flow of the Company is remote.
12
There are other minor legal proceedings to which the Company is a party. In
the Company's opinion, the claims asserted and the outcome of such proceedings
will not have a material adverse effect on the financial position, results of
operations or the cash flow of the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
13
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has been traded on The NASDAQ National Market
under the symbol "INMD" since the Company's formal name change in June 1996 and
prior to the name change under the symbol "IVFA" since May 21, 1993. Prior
thereto, the Company's Common Stock had been trading on the NASDAQ Small Cap
Market since October 8, 1992. The following table sets forth the high and low
closing sales price for the Common Stock, as reported on The NASDAQ National
Market.
Common Stock
---------------
High Low
---- -----
2002
First Quarter...................... 6.28 4.04
Second Quarter..................... 8.89 5.65
Third Quarter...................... 8.05 5.00
Fourth Quarter..................... 6.93 4.02
2003
First Quarter...................... 6.60 4.75
Second Quarter..................... 6.35 4.76
Third Quarter...................... 7.50 5.03
Fourth Quarter..................... 7.30 6.00
On March 6, 2004, there were approximately 87 holders of record of the
Common Stock and approximately 1,205 beneficial owners of shares registered in
nominee or street name.
The Company has not paid dividends on its Common Stock during the last two
fiscal years. The Company currently anticipates that it will retain all
available funds for use in the operation and expansion of its business, and
therefore, does not anticipate paying any cash dividends on its Common Stock for
the foreseeable future.
The Company has two stock option plans all of which have been approved by
the Company's shareholders. The following table sets forth certain information
relative to our stock option plans.
Number of securities
Number of Securities remaining available for
to be issued upon Weighted-average future issuance under
exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a)
------------- ------------------- ------------------- -----------------------
(a) (b) (c)
Equity compensation
plans approved by
security holders........ 701,247 $5.00 101,297
Equity compensation
plans not approved
by security holders..... -- -- --
------- ----- -------
Total................ 701,247 $5.00 101,297
======= ===== =======
On October 15, 2002, the Company completed its redemption of the
outstanding 165,644 shares of the Series A Cumulative Convertible Preferred
Stock (the "Preferred Stock") for $10.30 per share in accordance with the
Certificate of Designation for the Preferred Stock.
Unregistered shares of Common Stock and warrants to purchase shares of
Common Stock were issued during 2002, as described in the following paragraphs
in reliance of Section 4(2) of the Securities Act of 1933.
In 2002, the Company issued an aggregate of 37,640 shares of restricted
Common Stock to members of the Company's Board of Directors and officers of the
Company. These shares had a market value on the date of issuance of $249,000.
14
In 2002, the Company issued an aggregate of 7,089 shares of restricted
Common Stock to the physician partners of the Northwest Center for Fertility and
Reproductive Endocrinology, in connection with the FertilityPartners agreement.
These shares had a market value of $45,000 on the date of issuance.
During 2002, the Company took advantage of market conditions and engaged
in a private placement of its Common Stock and issued 220,000 shares of Common
Stock and 88,000 warrants to purchase Common Stock with a net market value of
$1,375,000. The warrants became exercisable on January 31, 2003 and expire on
January 31, 2006. The Company filed a registration statement to cover the resale
of the Common Stock and the resale of the Common Stock underlying the warrants.
The additional equity raised is intended for general corporate purposes. In
addition, 17,600 warrants were issued to the underwriter of the private
placement, which become exercisable July 30, 2002 and expire July 30, 2007.
In 2003, the Company issued an aggregate of 58,345 shares of restricted
Common Stock to members of the Company's Board of Directors and officers of the
Company. These shares had a market value on the date of issuance of $417,000.
ITEM 6. Selected Financial Data
The following selected financial data (for the years ended December 31,
2003, 2002, 2001, 2000 and 1999 are derived from the Company's consolidated
financial statements and should be read in conjunction with the financial
statements, related notes, and other financial information included elsewhere in
this Annual Report on Form 10-K.
Statement of Operations Data (1):
December 31,
-----------------------------------------------------
2003 2002 2001 2000 1999
------- ------ ------ ------ -------
(in thousands, except per share amounts)
Revenues, net ........................ $ 93,690 $ 88,200 $ 73,898 $ 56,999 $ 43,545
Costs of services incurred ........... 83,233 78,349 64,013 48,805 36,556
-------- -------- -------- -------- --------
Contribution ......................... 10,457 9,851 9,885 8,194 6,989
General and administrative expenses .. 8,761 8,097 7,827 5,880 6,084
Total other expenses, net ............ (16) 52 102 210 347
-------- -------- -------- -------- --------
Income (loss) before taxes ........... 1,712 1,702 1,956 2,104 558
Provision (benefit) for income taxes . 668 562 (4,557) 187 240
-------- -------- -------- -------- --------
Net income (loss) .................... 1,044 1,140 6,513 1,917 318
Less: Dividends paid and/or accrued on
Preferred Stock ................... -- 69 133 133 133
-------- -------- -------- -------- --------
Net income (loss) applicable to Common
Stock ............................. $ 1,044 $ 1,071 $ 6,380 $ 1,784 $ 185
======== ======== ======== ======== ========
Basic EPS ............................ $ 0.31 $ 0.33 $ 2.07 $ 0.43 $ 0.04
======== ======== ======== ======== ========
Diluted EPS .......................... $ 0.29 $ 0.31 $ 2.01 $ 0.43 $ 0.04
======== ======== ======== ======== ========
Weighted average shares - basic ...... 3,413 3,195 3,081 4,110 4,874
======== ======== ======== ======== ========
Weighted average shares - diluted ... 3,586 3,468 3,175 4,172 4,951
======== ======== ======== ======== ========
Balance Sheet Data:
December 31,
-------------------------------------------------------------
2003 2002 2001 2000 1999
------ -------- --------- -------- -------
(in thousands)
Working capital (2).......................... $2,688 $2,939 $ 4,208 $ 4,943 $ 5,705
Total assets ................................ 55,609 47,444 44,621 38,845 39,047
Total indebtedness........................... 7,511 1,410 2,691 3,569 5,410
Accumulated deficit.......................... (14,616) (15,660) (16,800) (23,313) (25,230)
Shareholders' equity......................... 33,165 31,557 30,615 25,987 26,639
(1) Certain amounts for the years ended December 31, 2002 and prior, have been
reclassified to conform with the presentation adopted for the year ended
December 31, 2003.
(2) Represents current assets less current liabilities.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the three years ended December 31, 2003. It should
be read in conjunction with the Company's Consolidated Financial Statements, the
related notes thereto and other financial and operating information included in
this Form 10-K.
Overview
IntegraMed America, Inc. (the "Company") offers products and services to
patients and providers in the fertility industry. The IntegraMed Network is
comprised of twenty-three fertility centers in major markets across the United
States, pharmaceutical products and services, a financing subsidiary, the
Council of Physicians and Scientists, and a leading fertility portal
(www.integramed.com). Sixteen Affiliate fertility centers purchase discrete
service packages provided by the Company and seven fertility centers have access
to the entire portfolio of products and services under the comprehensive
FertilityPartners(TM) program. All twenty-three fertility centers have access to
the Company's consumer services, principally pharmaceutical products and patient
financing products.
The Company's strategy is to align information, technology and finance
for the benefit of fertility patients, providers, and payers. The primary
elements of the Company's strategy include: (i) expanding the IntegraMed
Provider Network into new major markets; (ii) increasing the number and value of
service packages purchased by members of the IntegraMed Provider Network; (iii)
entering into additional FertilityPartners(TM) contracts; (iv) increasing
revenues at contracted FertilityPartners(TM) centers; (v) increasing the number
of Shared Risk Refund treatment packages sold to patients of the IntegraMed
Provider Network and managing the risk associated with the Shared Risk Refund
program; (vi) increasing sales of pharmaceutical products and services; and
(vii) developing Internet-based access to personalized health information.
Major events impacting financial condition and results of operations
In December 2000, the Company's agreement with the St. Barnabas Medical
Center based fertility center was terminated early. The Company received $1.44
million in liquidated damages pursuant to an early termination agreement. These
funds were recorded as revenue by the Company during 2001 as compensation for
certain performance obligations contained in the termination agreement.
During 2001, the Company negotiated revised fee structures on all five of
its then existing major FertilityPartners contracts. On four of these contracts
in which service fees are comprised of (a) a tiered percentage of revenue, (b) a
fixed percentage of fertility center earnings and (c) reimbursed cost of
services. The Company negotiated lower percentages on the revenue and fertility
center earnings components. These lower revenue percentages were to be phased in
over an approximate five-year period. In 2003, fee structures on three of these
contracts were revised as described below. On the remaining FertilityPartners
contract, the Company negotiated higher service fees, which were assessed at a
fixed amount each month independent of the fertility center's underlying revenue
or earnings. The Company terminated its FertilityPartner agreement with this
fertility center effective June 30, 2003, and currently maintains a relationship
with this center under its FertilityDirect program.
On April 26, 2002, the Company signed a FertilityPartners agreement with
the Margate, Florida based Northwest Center for Infertility and Reproductive
Endocrinology ("NCIRE"). Under the terms of the 15-year agreement, the Company's
service fees are comprised of reimbursed costs of services, a tiered percentage
of revenues, and an additional fixed percentage of NCIRE earnings. The Company
has budgeted up to $2 million to fund the development and equipping of a new
state-of-the-art facility to house the clinical practice and embryology
laboratory for NCIRE and its patients.
On July 30, 2002, the Company completed a private placement of 220,000
shares of its Common Stock at $6.25 per share and warrants to purchase 88,000
shares of Common Stock at an exercise price of $9.00 per share, resulting in
gross proceeds of $1,375,000. The warrants become exercisable commencing January
31, 2003 and will expire on January 31, 2006. Additionally, warrants to purchase
17,600 shares of Common Stock at an exercise price of $6.25 per share were
issued to the underwriter in connection with the private placement. These
warrants become exercisable July 30, 2002 and will expire on July 30, 2007.
On November 25, 2002, the Company announced the ending of its
FertilityPartners agreement with RSA of New York. The agreement ended on
November 15, 2003. RSA of New York serves the Long Island market and revenues
for the four quarterly periods ending prior to the announcement were $9.1
million. The program had a contribution of $750,000 for the same period. At the
time of the announcement, the Company evaluated its exclusive business rights
asset associated with RSA of New York and reduced that asset to its realizable
value by adjusting the asset downward by $350,000.
16
During 2003, the Company again negotiated revised fee structures on three
of its existing FertilityPartner contracts. In all three of these contracts, the
timetable for the phase-in of that portion of the fee reductions which are based
on the earnings of the underlying fertility centers, and which were negotiated
in 2001 and are described above, were delayed by one year. Beginning in the year
2006, two of these revised contracts, also contain a maximum limit on the amount
of fees the Company can earn, which are based on the earnings of the underlying
fertility centers. These maximum limitations are below the fees earned by the
Company on these portions of the contracts in 2003. The third contract contains
no maximum limitation. The Company believes that these fee limitations will be
offset by volume based increases in fees earned in other areas of its existing
contracts, the sale of new FertilityPartner contracts and growth in its
FertilityDirect business unit.
In July 2003, the Company amended its existing credit agreements with Fleet
Bank, N.A. The amended agreement is comprised of a renewal of the Company's $7.0
million three-year working capital revolver and a new $5.75 million three year
term loan, of which $0.75 million was used to retire the outstanding balance on
the Company's previous term loan. The Company believes that these credit
facilities will be sufficient to fund its current operational, capital
investment and acquisition plans.
On September 1, 2003, the Company signed a FertilityPartners agreement with
the Charlotte, North Carolina based Reproductive Endocrinology and Andrology of
Charlotte ("REACh") physician practice. Under the terms of this 15-year
agreement, the Company's service fees are comprised of reimbursed costs of
services, a tiered percentage of revenues, and an additional fixed percentage of
REACh's earnings. The Company has also committed up to $2 million to fund the
development and equipping of a new state-of-the-art facility to house the
clinical practice and embryology laboratory for REACh and its patients.
In January 2004, the Company signed a FertilityPartner agreement to supply
a complete range of business, marketing and facility services to a group of
fertility physicians in the Company's Western Region. Under the terms of the
15-year agreement, IntegraMed will build a new facility and help the group to
establish a private, full service fertility center. IntegraMed has committed up
to $2 million to fund the development and equipping of a new state-of-the-art
facility to house the clinical practice and embryology laboratory for the group
and its patients. Upon its completion, the facility will accommodate the
existing patient volume and future anticipated growth. Based on the terms of the
transaction, IntegraMed will be paid a fixed services fee commencing in January
of 2004 paid monthly until the new facility is open, which is anticipated to be
in Q4 of 2004. At that time, IntegraMed service fees will be comprised of the
Company's standard reimbursed costs of services, a fixed percentage of revenues,
plus an additional fixed percentage of the new center's earnings.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants list their most
"critical accounting policies" in MD&A. The SEC indicated that a "critical
accounting policy" is one which is both important to the portrayal of the
company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. We
believe that the following accounting policies fit this definition:
Basis of consolidation --
The consolidated financial statements comprise the accounts of IntegraMed
America, Inc. and its wholly owned subsidiaries. All significant inter-company
transactions have been eliminated. The Company principally derives its revenues
from FertilityPartners contracts, the sale of pharmaceutical products and
patients enrolling in its Shared Risk Refund program. The Company does not have
a controlling financial interest in any of the medical practices to which it
provides services and as such does not consolidate their results.
Use of Estimates--
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the accompanying consolidated financial statements and related footnotes. In
preparing these financial statements, management has made its best estimates and
judgments of certain amounts included in the financial statements, giving due
consideration to materiality. The Company does not believe there is a great
likelihood that materially different amounts would be reported related to the
accounting policies described below. However, application of these accounting
policies involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates.
17
Revenue and cost recognition --
FertilityPartners service fees
As of December 31, 2003, the Company provided comprehensive services to
fertility centers under six FertilityPartners contracts. Under all six
agreements, the Company receives as compensation for its services a three-part
fee comprised of: (i) a tiered percentage of net revenues, (ii) reimbursed costs
of services (costs incurred in servicing a fertility center and any costs paid
on behalf of the fertility center) and (iii) a fixed percentage of earnings
after services fees.
All revenues from FertilityPartners service fees are recorded in the period
services are rendered. Direct costs incurred by the Company in performing its
services and costs incurred on behalf of the medical practices are reported as
costs of services. Revenue and costs are recognized in the same period in which
the related services have been performed.
Pharmaceutical Sales
The Company distributes fertility related pharmaceutical products through
IPSI. The Company has a servicing arrangement with ivpcare, inc., to fulfill the
purchase and distribution of those pharmaceuticals. IPSI accepts patient orders,
verifies patient insurance coverage where applicable and ships
prescription-based pharmaceuticals directly to patients of certain affiliated
fertility centers. Revenue is derived from the sales of these pharmaceuticals
and is recorded, along with the related costs including the fee due ivpcare,
when shipments are made. The cost of pharmaceutical products purchased is
recorded as a cost of sales and is not offset against revenues.
Pharmaceutical sales accounts receivable represent receivables held by IPSI
for medications sold directly to patients. Risk of loss in connection with
uncollectibility of these accounts receivable is borne by the Company.
Shared Risk Refund Program
The Shared Risk Refund program consists of a fertility treatment package
that includes up to three cycles of in vitro fertilization for one fixed price
with a significant refund if the patient does not deliver a baby. Under this
innovative financial program, the Company receives payment directly from
consumers who qualify for the program and pays contracted fertility centers a
defined reimbursement for each treatment cycle performed. Expenses related to
the program are recorded as incurred. Potentially refundable revenues are
deferred until the pregnancy outcome is determined. The Company manages the risk
associated with the Shared Risk Refund program through a case management
program. This case management program authorizes patient care and provides
information to be used in recognizing revenue. A reserve for estimated refunds
due to pregnancy loss is maintained and based on historical averages of
pregnancy losses applied to the revenues recorded within the applicable periods.
Due from Medical Practices --
Due from Medical Practices represents the net amounts owed to the Company
by the medical practices. This balance is comprised of amounts owed to the
Company by the medical practices for funds, which the Company has advanced to
the practices for use in financing their accounts receivable, less balances owed
to the medical practices by the Company for undistributed amounts earned by
their physicians. Due from Medical Practices excludes amounts owed by the
Company to medical practices for acquired exclusive services rights since the
Financial Accounting Standards Board Interpretation 39 conditions for offset are
not met for these obligations. Such acquired rights are reported as intangible
assets.
Income taxes --
The Company accounts for income taxes utilizing the asset and liability
approach in accordance with Financial Accounting Standards No. 109, "Accounting
For Income Taxes" (FAS 109). The income tax (benefit) provision is determined
under the asset and liability approach. Deferred tax assets and liabilities are
recognized on differences between the book and tax basis of assets and
liabilities using presently enacted tax rates. The income tax (benefit)
provision is the sum of the amount of income tax paid or payable for the year as
determined by applying the provisions of enacted tax laws to the taxable income
for that year and the net change during the year in the Company's deferred tax
assets and liabilities.
18
Exclusive Service Rights --
Exclusive service rights represent costs incurred by the Company for the
right to service certain fertility centers and are valued at cost less
accumulated amortization, which is provided on a straight-line basis over the
length of the contract, usually ten to twenty-five years. The Company
periodically reviews exclusive business service rights to assess recoverability;
any impairment would be recognized in the consolidated statement of operations
if a permanent impairment was determined to have occurred. Recoverability is
determined based on undiscounted expected earnings from the related business
over the remaining amortization period.
Results of Operations
The following table shows the percentage of net revenue represented by
various expenses and other income items reflected in the Company's Consolidated
Statement of Operations for the years ended December 31, 2003, 2002 and 2001:
2003 2002 2001
---- ---- ----
Revenues, net (see Note 2):
FertilityPartners service fees ......................... 79.4% 75.8% 79.1%
Pharmaceutical Sales.................................... 17.4% 22.3% 20.4%
FertilityDirect revenues................................ 3.2% 1.9% 0.5%
---- ---- ----
Total revenues........................................ 100% 100% 100%
Costs of services incurred:
FertilityPartners service fees........................... 69.9% 66.0% 66.1%
Pharmaceutical Sales..................................... 16.9% 21.5% 19.6%
FertilityDirect revenues................................. 2.1% 1.3% 0.9%
---- ---- ----
Total costs of services incurred....................... 88.9% 88.8% 86.6%
Contribution:
FertilityPartners service fees........................... 9.5% 9.8% 12.9%
Pharmaceutical Sales..................................... 0.5% 0.9% 0.8%
FetilityDirect revenues.................................. 1.1% 0.5% (0.3)%
---- ---- ----
Total contribution..................................... 11.1% 11.2% 13.4%
General and administrative expenses........................... 9.3% 9.2% 10.6%
Interest income............................................... (0.1)% (0.1)% (0.2)%
Interest expense.............................................. 0.1% 0.2% 0.4%
------ ---- -------
Total other expenses................................... 9.3% 9.3% 10.8%
Income from operations before income taxes.................... 1.8% 1.9% 2.6%
Income tax (benefit) provision................................ 0.7% 0.6% (6.2)%
------ ---- ------
Net income (a)................................................ 1.1% 1.3% 8.8%
(a) Excluding the effect of the adjustment related to reducing the valuation
allowance on deferred tax assets, net income as a percentage of net revenues
would have been 2.3% for the year ended December 31, 2001 (See Note 10 to the
Consolidated Financial Statements).
Calendar Year 2003 Compared to Calendar Year 2002
Revenues for the year ended December 31, 2003 increased by a net $5.5
million, or 6.2%, from the year ended 2002. The main factors contributing to
this net increase were:
(i) Revenues at FertilityPartner centers increased by $7.6 million, or
11.3%. This increase was largely driven by increased patient
volume resulting from intensified marketing campaigns, above
average pregnancy rates for infertility treatment, in some cases,
the addition of new physicians to the practice and new agreements.
The mature (FertilityPartner agreement established prior to 2002)
centers grew $6.6 million. The FertilityPartners agreement signed
with NCIRE in April 2002, contributed a full years revenue of $6.1
million vs. approximately $2.3 million in the year ended December
31, 2002. The FertilityPartners agreement signed with REACh in
September 2003 contributed $1.2 million in revenues in 2003.
Revenues from these new FertilityPartner agreements were partially
offset by the termination of our FertilityPartner agreement with
RSA of New York in June of 2003. The RSA agreement generated
revenues of $4.8 million in 2003 vs. revenues of $8.8 million in
2002.
19
(ii) Revenue at the Company's pharmaceutical unit decreased by $3.4
million, or 17.3%. This reduction in revenue was the result of the
Company's decision to de-emphasize the sale of certain high volume
products due to the lack of profitability resulting from pricing
pressures within the market. The Company believes that these
pricing issues have been resolved by price changes agreed to by
the payers and that revenues and volume will increase in future
periods.
(iii) FertilityDirect revenues, which are comprised primarily of the
Company's Shared Risk Refund program and membership fees from
affiliated clinics, increased by $1.3 million, or 80.2% from prior
year levels. The Company anticipates continued growth of its
FertilityDirect programs will become a significant component of
it's direct to consumer orientation.
Contribution of $10.5 million in 2003 was up $0.6 million, or 6.1% from
2002 levels. As a percentage of revenue, the contribution margin remained
unchanged at 11.2% for both 2003 and 2002 results. The following factors had a
significant effect on contribution in 2003:
(i) Contribution generated by the Company's FertilityPartners
increased by $0.3 million in 2003, despite a decline in margin to
12.0% from a 12.9% level in 2002. Higher aggregate contributions
levels were generated by strong patient volume growth among the
FertilityPartner clinics. However margin rates declined slightly
due to the effect of the Company's previously disclosed fee
structure, negotiated in 2001, which called for reduced fees to be
phased in over a number of years. The mature centers contribution
fell $0.2 million. The FertilityPartners agreement signed with
NCIRE in April 2002, contributed a full years contribution of $0.6
million vs. approximately $0.3 million in the year ended December
31, 2002. The FertilityPartners agreement signed with REACh in
September 2003 contributed $0.1 million in contribution in 2003.
Contribution for the terminated FertilityPartner agreement with
RSA of New York generated contribution $0.6 million in 2003 vs.
contribution of $0.5 million in 2002.
(ii) Pharmaceutical contribution declined by $0.3 million, or 39.1%,
during 2003 and margin rates slipped to 2.9% from 3.9% in the
prior year. The decline in contribution was a result of the
Company's decision to de-emphasize certain specific high volume
pharmaceuticals products, which became unprofitable due to
manufacturer pricing increases coupled with insurance
reimbursement reductions. The Company believes these pricing
issues are resolved by payers acceptance of increased prices and
anticipates its pharmaceutical margin to improve in 2004.
(iii) Contribution in the Company's FertilityDirect program increased
$0.6 million, or 143.5% during 2003. These increases were driven
by increased Shared Risk Refund patient volume, additional
fertility clinics participating in the FertilityDirect program as
well as a higher monthly fee structure for these clinics.
General and Administrative expenses increased by $0.7 million, to $8.8
million in 2003 from $8.1 million in 2002. This increase is mainly the result of
additional marketing costs in support of the Company's FertilityDirect program,
and costs associated with new regulatory compliance requirements.
Interest income rose to $125,000 for the year ended December 31, 2003, from
$103,000 in 2002. This increase is attributable to additional interest income
earned on capital investments at some FertilityPartner clinics. Interest expense
declined to $109,000 for the year ended December 31, 2003 from $155,000 for 2002
as a result of scheduled debt reductions in the first two quarters of 2003.
The provisions for income tax were approximately $0.7 million and $0.6
million for the years ended December 31, 2003 and 2002, respectively. There were
no Federal income tax payments during 2003 due to the utilization of the
Company's net operating loss carry forwards. The Company's effective tax rate
for 2003 was approximately 39% and reflects a provision for current state taxes
as well as amortization of the Company's deferred Federal tax asset.
Calendar Year 2002 Compared to Calendar Year 2001
Revenues for the year ended December 31, 2002 increased by $14.3 million, or
19.4%, from the year ended 2001. The main factors contributing to this increase
were:
(i) Revenues increased at the core FertilityPartners centers as a
result of increased patient volume. Same center growth was 17.1%
over the prior year. The volume increase was the result of
intensified marketing initiatives, improved pregnancy rates for
infertility treatment, and, in some cases, the addition of new
physicians to the practice. In addition, the FertilityPartners
agreement signed with NCIRE in April 2002, contributed
20
approximately $2.3 million of revenue for the year ended December
31, 2002.
(ii) The Company's pharmaceutical division experienced a 30.5% increase
in revenue. This increase was driven by increases in patient
volume at the IntegraMed Provider Network, as well as increased
participation and penetration of the pharmaceutical product line
among the IntegraMed Provider Network.
(iii) FertilityDirect revenues, comprised primarily of the Company's
Shared Risk Refund program, increased from $0.4 million for the
year ended December 31, 2001 to $1.7 million for 2002. The Company
anticipates that continued growth of this program, driven in part
by focused marketing efforts, will become a significant component
of its direct to consumer orientation.
Contribution of $9.9 million in 2002 remained unchanged from 2001. As a
percentage of revenue, the contribution margin decreased to 11.2% in 2002 from
13.4% in 2001. The following factors contributed to the stability of the
contribution:
(i) As previously disclosed, the Company's revised fee structure with
its FertilityPartners contracts provides for reduced fees and
margins on the incremental earnings of those Centers. During 2002,
while continued growth of the FertilityPartners contracts resulted
in greater aggregate revenues for the Company, several components
of this revenue stream were at the lower contractual incremental
margins. During 2002, the Company adopted EITF 01-9, Accounting
for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products, which required the Company to report its
revenue net of the amortization of its services rights. While
revenue for all years presented has been restated to reflect this
change, results for 2002 include a $350,000 write-down of service
rights related to the mutual termination of the Company's New York
based FertilityPartners agreement.
(ii) The Company's pharmaceutical sales, which grew by $4.6 million, or
30.5%, during the year ended December 31, 2002, have a margin of
approximately 4%, which is substantially below the margin of the
Company's other revenue components. As the Company's
pharmaceutical segment continues to expand faster than the
Company's other product lines, the weighted impact will be an
anticipated reduction in the Company's margins.
(iii) As previously discussed, the Company's agreement with the medical
center based fertility center generated a payment for damages that
was recorded in 2001. This approximately $1.4 million payment had
minor costs associated with it and the $1.4 million resulted in
gross contribution dollars in 2001. There was no similar payment
in 2002.
General and Administrative expenses increased by $0.3 million, to $8.1
million in 2002 from $7.8 million in 2001. This increase was mainly attributable
to increasing costs associated with the Company's efforts to expand the base of
fertility centers participating in its FertilityDirect program and to support
the growth of its Shared Risk Refund product line.
Interest expense declined from $281,000 for the year ended December 31,
2001 to $155,000 for 2002 as a result of scheduled debt reductions as well as
declining interest rates as the Company's debt carries interest at rates that
use LIBOR as a base. Interest income declined from $179,000 for the year ended
December 31, 2001 to $103,000 in 2002 as a result of falling interest rates.
Income tax provisions (benefits) were approximately $0.6 million and ($4.6)
million for the years ended December 31, 2002 and 2001, respectively. The 2001
benefit was a result of reducing the valuation allowance for deferred tax assets
due to sustained profitability over an extended period and the increased
likelihood of realization of the deferred tax assets. There have been no current
Federal income tax payments due to the utilization of the net operating loss
carry forwards. The Company's effective tax rate for 2002 was approximately 33%
and reflects credits for the reversal of state taxes provided in prior periods.
The 2001 effective tax rate was approximately 12%, excluding the effects of the
change in the valuation allowance, and reflects credits for the utilization of
net operating loss carry forwards not previously provided.
Off-balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that
generate relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special purpose
entities ("SPE's"), which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. As of December 31, 2003, we are not involved in any material
unconsolidated SPE transactions.
21
Liquidity and Capital Resources
Historically, the Company has financed its operations by the sale of equity
securities, issuance of notes and internally generated resources. In addition,
the Company also uses bank financing for working capital and business
development. The Company's working capital decreased slightly during 2003 to
$2.7, million as of December 31, 2003 from $2.9 million as of December 31, 2002.
The Company believes that working capital and, specifically, cash and cash
equivalents remain at adequate levels to fund the Company's operations. As of
December 31, 2003, the Company did not have any significant purchase commitments
for the acquisition of fixed assets, however, it has budgeted upcoming capital
expenditures of approximately $8.8 million for 2004. These expenditures are
primarily related to the expansion of the Company's FertilityPartners centers,
including the construction of new clinics in North Carolina and on the West
Coast. . The Company believes that the cash flows from its operations plus its
credit facility and new term loan (see below) will be sufficient to provide for
its future liquidity needs for the next twelve months.
On July 31, 2003, the Company amended its existing credit facility with
Fleet Bank, N.A. The amended facility is comprised of a $7.0 million three-year
working capital revolver and a $5.75 million three-year term loan, of which
approximately $5.0 million was used for the acquisition of fixed assets and to
fund the payment for Exclusive Business Rights in connection with the North
Carolina transaction and $0.75 million was used to repay the remaining
outstanding balance of the previous credit facility. Each component bears
interest by reference to Fleet's prime rate or LIBOR, at the Company's option,
plus a margin, which is dependent upon a leverage test, ranging from 2.25% to
2.75% in the case of LIBOR-based loans. Prime based loans are made at Fleet
Bank's prime rate and do not contain an additional margin. Interest on the
prime-based loans is payable monthly and interest on LIBOR-based loans is
payable on the last day of each applicable interest period. Unused amounts under
the working capital revolver bear a commitment fee of 0.25% and are payable
quarterly. Availability of borrowings under the working capital revolver is
based on eligible accounts receivable as defined. As of December 31, 2003, the
Company had borrowed $2.0 million under its working capital revolver agreement
for general corporate purposes, The remaining working capital revolver balance
of $5.0 million is available to the Company. The Fleet credit facility is
collateralized by all of the Company's assets.
The Company is also continuously reviewing its credit agreements and
may renew, revise or enter into new agreements from time to time as deemed
necessary.
Significant Contractual Obligations and Other Commercial Commitments:
The following summarizes the Company's contractual obligations and other
commercial commitments at December 31, 2003, and the effect such obligations are
expected to have on its liquidity and cash flows in future periods.
Payments Due by Period
Total Less than 1 year 1 - 3 years 4 - 5 years After 5 years
-------------- ---------------- ---------------- ----------- -------------
Notes Payable................. $ 7,238,000 $3,213,000 $ 4,025,000 $ -- $ --
Capital lease obligations..... 302,000 71,000 231,000 -- --
Operating leases.............. 27,107,000 4,561,000 12,309,000 6,354,000 3,883,000
Total contractual cash
obligations............... $34,647,000 $7,845,000 $16,565,000 $6,354,000 $3,883,000
Amount of Commitment Expiration Per Period
Total Less than 1 year 1 - 3 years 4 - 5 years After 5 years
------------- ---------------- ------------- ------------- -------------
Lines of credit............... $ 7,000,000 $ -- $7,000,000 $ -- $ --
Total commercial
commitments............... $ 7,000,000 $ -- $7,000,000 $ -- $ --
The Company also has commitments to provide accounts receivable financing
under its FertilityPartners agreements. The Company's financing of this
receivable occurs on the 15th of each month. The medical practice's repayment
priority consists of the following:
(i) Reimbursement of expenses that the Company has incurred on their
behalf;
22
(ii) Payment of the fixed or, if applicable, the variable portion of the
Service Fee which relates to the FertilityPartners revenues; and
(iii) Payment of the variable portion of the Service Fee.
The Company is responsible for the collection of the practice's
receivables, which are financed with full recourse. The Company has continuously
funded these needs from cash flow from operations and the collection of the
prior month's receivables. If delays in repayment are incurred, which have not
as yet been encountered, the Company could draw on its existing working capital
line of credit. The Company makes payments on behalf of the FertilityPartners
for which it is reimbursed in the short-term. Other than these payments, as a
general course, the Company does not make other advances to the medical
practice. The Company has no other funding commitments to the FertilityPartners.
New Accounting Standards
Financial Accounting Standards Board Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51". Interpretation No.
46 clarifies Accounting Research Bulletin No. 51, "Consolidated Financial
Statements" related to whether companies should consolidate certain entities,
called variable interest entities. Under Interpretation No. 46, the Company is
required to evaluate whether its affiliated fertility groups, for which it
provides business services under long-term service agreements, are variable
interest entities. Pursuant to Interpretation No. 46, an enterprise that absorbs
a majority of the economic risks and rewards of a variable interest entity is
required to consolidate the variable interest entity for financial reporting
purposes. Interpretation No. 46 is effective immediately for variable interest
entities created after January 31, 2003 and for interim periods ending after
September 15, 2003 for which a variable interest was in place prior to February
1, 2003. In October 2003, the FASB issued Financial Staff Position 46-6,
"Effective Date of FASB Interpretation No. 46, Consolidation of Variable
Interest Entities," deferring the effective date under certain circumstances
until the first interim or annual period ending after December 15, 2003. In
December 2003, the FASB issued Interpretation No. 46(R) revising Interpretation
No. 46 and deferring the effective date under certain circumstances until the
first interim or annual period ending after March 15, 2004. The Company has
deferred the effective date in accordance with Interpretation No. 46(R) and
continues to evaluate Interpretation No. 46 and assess the impact on its
consolidated financial statements.
Statement of Financial Accounting Standards No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities
In April, 2003, the Financial Accounting Standards Board (FASB or the
"Board") issued FASB 149 which amends Statements No. 133, Accounting for
Derivative Instruments and Hedging Activities, and No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, and establishes
accounting and reporting standards for derivative instruments including
derivatives embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. The Company does not believe the
adoption of FASB 149 will have an impact on its financial statements.
Statement of Financial Accounting Standards No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
In May 2003 the Board issued FASB 150, which establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. Some of the provisions of this Statement are consistent
with the current definition of liabilities in FASB Concepts Statement No. 6,
Elements of Financial Statements. The remaining provisions of this Statement are
consistent with the Board's proposal to revise that definition to encompass
certain obligations that a reporting entity can or must settle by issuing its
own equity shares, depending on the nature of the relationship established
between the holder and the issuer. The Company does not believe the adoption of
FASB 150 will have an impact on its financial statements.
Forward Looking Statements
This Form 10-K and discussions and/or announcements made by or on behalf of
the Company, contain certain forward-looking statements regarding events and/or
anticipated results within the meaning of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, the attainment of which
23
involve various risks and uncertainties. Forward-looking statements may be
identified by the use of forward-looking terminology such as, "may", "will",
"expect", "believe", "estimate", "anticipate", "continue", or similar terms,
variations of those terms or the negative of those terms. The Company's actual
results may differ materially from those described in these forward-looking
statements due to the following factors: the Company's ability to acquire
additional FertilityPartners agreements, including the Company's ability to
raise additional debt and/or equity capital to finance future growth, the loss
of significant FertilityPartners agreement(s), the profitability or lack thereof
at fertility centers serviced by the Company, increases in overhead due to
expansion, the exclusion of fertility and ART services from insurance coverage,
government laws and regulation regarding health care, changes in managed care
contracting, the timely development of and acceptance of new fertility, and ART
and/or genetic technologies and techniques.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Our interest expense is sensitive to changes in the general level of
interest rates. At December 31, 2003 we had an oustanding balance of $2,000,000
under a working capital revolver and $5,175,000 under a term loan. Both
borrowings have a remaining term of approximately 2.5 years. Each borrowing
bears interest at LIBOR plus a margin. At December 31, 2003, both borrowings had
an interest rate of approximately 4.00%. The Company has not entered into any
interest rate swap transactions.
ITEM 8. Financial Statements and Supplementary Data
See Index to Financial Statements on page F-1.
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures - Under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act) as of December 31, 2003 (the "Evaluation
Date"). Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that as of the Evaluation Date, our disclosure
controls and procedures are effective in timely alerting them to the material
information relating to us (or our consolidated subsidiaries) required to be
included in our periodic SEC filings.
Changes in Internal Controls - There were no significant changes made in
our internal controls during the period covered by this report or, to our
knowledge, in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information with respect to the executive officers and directors of the
Company is incorporated by reference from the Company's Proxy Statement relating
to the Annual Meeting of Shareholders to be held on May 18, 2004.
The Company has an Audit Committee comprised solely of independent
directors, one of whom is a financial expert, as defined by Item 401 of
Regulation S-K. The members of the Audit Committee are identified under the
Committees of the Board Section of the Company's Proxy Statement relating to the
Annual Meeting of Shareholders to be held on May 18, 2004 and is incorporated
herein by reference.
The Company has adopted a Code of Ethics applicable to directors and
principal executive, financial and accounting officers of the Company. Such Code
of Ethics is filed as an Exhibit to this Form 10-K and is available at the
Company's website http://www.integramed.com.
ITEM 11. Executive Compensation
This information is incorporated by reference from the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on May 18,
2004.
24
ITEM 12. Security Ownership of Certain Beneficial Owners and Management, and
Related Stockholder Matters
This information is incorporated by reference to the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on May 18,
2004.
ITEM 13. Certain Relationships and Related Transactions
This information is incorporated by reference to the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on May 18,
2004.
ITEM 14. Principal Accounting Fees and Services
This information is incorporated by reference to the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on May 18,
2004.
PART IV
ITEM 15. Exhibits, Financial Statements, Schedule, and Reports on Form 8-K
(a) (1) Financial Statements.
(3) The exhibits that are listed on the Index to Exhibits
herein which are filed herewith as a management agreement
or compensatory plan or arrangement are: 10.61(f);
10.95(d); 10.105(g); 10.113(j); 10.118(c); 14.1.
(b) Reports on Form 8-K.
For the quarter ended December 31, 2003, Registrant filed
a Form 8-K dated: October 6, 2003 announcing the Company
at number 12 on Crain's list of fastest growing New